Breaking In

I’ve written before about the British wine market, the most important marketplace in the world of wine. Everyone wants a place on Britain’s Wine Wall, but breaking in isn’t easy to do, as a recent Decanter article and a conversation with one of my former students makes clear.

Decanter Discovers Washington Wine.

Many Washington winemakers are keen to try to get their feet in the door of European markets. They figure that the time is right: the dollar is cheap and their wines are excellent. They cannot help but be pleased, therefore, with the July 2008 issue of Decanter magazine, which features an article about Washington wine by regional wine critic Paul Gregutt. Three pages of text, maps, photos and wine reviews – it’s a nice package. Several of the wineries mentioned even backed up the effort with two pages of advertising. A really good display for Washington wines in the world’s most influential wine magazine.

But there’s a problem. British buyers know about these great wines now (more than ten wineries are mentioned including Columbia Crest, Seven Hills, L’Ecole 41 and Reininger), but only one (Columbia Crest) has current British distribution. Want one of the other nine? Call the winery in Washington State, the Decanter listing says. You’ve got to wonder how many buyers will do this and how many will just turn the page to the next New World wine – one that is actually available in Britain. You need publicity to get distribution, I know, but publicity without distribution doesn’t make the cash register ring.

On a different note, I have to wonder about the quoted price for the Columbia Crest Horse Heaven Hills Chardonnay. Wine Spectator gives it 91 points and lists the price at $15. The British price is apparently £19.53 or about two and a half times as much in dollar terms.! It’s not going to be easy to break into European markets under these circumstances,

When Gallo Went to Europe

Gallo today is a classic American integrated wine multinational. Although it is based in Modesto, in the heart of California’s Central Valley, and the bulk of its business is U.S. market, Gallo has complex international linkages. Gallo sources wine from Italy, France, Australia and New Zealand and sells wine in Europe, Japan, and Latin America. But it wasn’t always that way. Gallo’s was drawn into the global marketplace in the 1980s, attracted by the markets in Britain and Germany.

I asked my former student Steve Emery to tell me what happened when these American wines (and American wine ideas) invaded Europe. Steve is CEO of Earth2O, an Oregon company that bottles and distributes water from pristine Opal Springs near scenic Bend, but in the late 1980s he was Director of Sales for Gallo’s program to establish its varietal wines in England, Ireland and Germany. His experiences say a lot about the nature of global wine then and now and the problems of breaking into new markets.

Getting Gallo into Europe was difficult, Steve told me, although ultimately successful. Even though Gallo is a huge presence at home, it was an unknown quantity abroad. I remember seeing Gallo wines on the shelf of my local wine shop when I taught in England in 1989 and I was surprised at the price point. Gallo wines seemed expensive to me, about the same price as the most popular French and Italian wines on the shelves. I expected Gallo to be a cheaper brand like it was at home. But the advantage of lower price wasn’t really possible in the British market, given such obvious barriers as transportation costs and not-so-obvious hurdles such as the British wine tariff.

Many countries tax wine imports, whether to collect revenue, protect domestic winemakers, or try to shift consumption to other commodities such as local beers and spirits. Britain is not unusual in this regard. What makes Britain different is that the tax is relatively high and levied on a per-bottle basis (and only on non-EU wines, of course). Britain collects more than $2 on each bottle of imported. (£1.29 according to a recent Rabobank report). The flat per-bottle tax has a way of shifting the demand for wine towards more expensive products. A $2 tax on a $2 wine represents a 100 percent tax. For a $4 wine, a $2 tax increases the price to $6, a 50 percent rise. For a $10 wine, the tax raises the price to $12, only a 20% increase. So the tariff falls heaviest on lower price goods and shifts the market upscale towards better or at least more expensive bottles and wines produced in the EU, not the New World. The cost advantage that Gallo enjoyed in the United States was partially offset by the British tariff regime.

But that wasn’t the main problem, Steve told me. The British supermarkets were savvy retailers – some of the wine buyers were highly trained Masters of Wine – the highest designation in wine education. But they were organized to purchase and market wines based on geographic region rather than brand or type of wine. As Steve says, they didn’t think in terms of brands (apart from the obvious fact of their own store brands). This is true even today. If you go into a Marks and Spencer store in Britain, you will find a world of wine available, but the wine is mainly organized and labeled according its place of origin rather than a US-style brand. The wine’s “pedigree” (Friuli D.O.C. Grave Merlot, for example, or Macon Rouge, appellation Macon Rouge contrôlée) is listed in big letters, but the maker’s name and the brand – custom bottled for Marks and Spencer – are tiny by comparison. The wines that Gallo sent to Europe were California wines, a useful geographic designation, but Gallo was the brand that defined the wine, not California.

British wine marketing was also different in other ways. Steve told me that the British weren’t applying the basic Wine 101 lessons he learned with Gallo in the U.S. – lessons about where to put the most profitable wine (right at eye level on the shelf), where to position your target products in a wine cooler (on the right, where most people will look and reach first) and the many strategies of point-of-sale merchandising. They also introduced print advertising to the wine market successfully.

Gallo had to adapt, Steve said, to be successful in the foreign environment, even replacing the practical screw caps on its least expensive wines with more traditional cork closures (creating a shortage of corks in the process).

The German Problem

Germany was even more difficult, Steve said. That’s easy to understand given the focus on bargain basement wines. It doesn’t seem like most German buyers are interested in paying for a brand. Low price seems to be the main factor and cheaper wines were readily available, Steve said, from Germany, Italy and France. The supermarket wine buyers didn’t want to talk to him, Steve said, so Gallo resorted to guerrilla marketing. They got into the stores through the meat department, using a technique called cross-merchandising. They sold the wine as the perfect accompaniment to beef, chicken and fish rather than wine alone. Every meat purchase was therefore a potential wine sale as well. You are probably familiar with cross-merchandising yourself, even if you’ve never heard the work before. It is the process that has placed small displays of wine all over your supermarket, so that you never miss an opportunity to pair up wine with whatever you actually came to buy. The Germans seem to understand cross-marketing very well now. I visited my local Trader Joe’s this morning and found wine everywhere. I think there was probably more wine spread throughout the store than in the wine section itself.

The wine business is very competitive and Gallo found that the “rules of the game” were much different in Europe. Wine is regulated as an alcoholic beverage in the U.S., so every aspect of its sales is subject to federal or state regulation. In Europe, however, Steve said, wine is just another product and the competition is much freer. That’s why he was able to bargain with the meat department managers in Germany rather than go through the wine buyer department.

Gallo was very successful in Britain and in Europe and many other American wine companies have followed them, but that hasn’t eliminated the challenge of breaking into new markets. I wish our Washington winemakers good luck in their well-timed assault on the Old World markets. It’s not going to be easy.

The Wine Economist

What would you get if you crossed the Wine Spectator, America's best-selling wine magazine, with the Economist, the world's leading business weekly? The answer is this blog, The Wine Economist, which analyzes and interprets today's global wine markets. Staff: Mike Veseth (editor-in-chief) & Sue Veseth (contributing editor).